Bankruptcy and Social Security Benefits: A Primer
Social Security benefits, whether disability-related or age-related, are 100 percent exempt in an Illinois bankruptcy. The same exemption applies to most other government benefits, such as federal VA disability benefits and state workers’ compensation benefits. The bankruptcy exemption doesn’t suspend offset rules, so debtors may not get to keep all their benefits. However, the Automatic Stay could affect the offset procedure. More on that below.
The Social Security exemption is straightforward, but otherwise, bankruptcy is a very complex proceeding, beginning with the type of bankruptcy a debtor should file. Do-it-yourself debtors save money during this process, but serving as your own lawyer is generally a bad idea. Nonlawyer bankruptcy petition preparers aren’t much better. These individuals help debtors fill out forms, but they cannot do anything else, such as give legal advice. Only a Chicago bankruptcy lawyer has the whole package.
Issues in an Over-60 Bankruptcy
Even as overall bankruptcy filing has declined, this age group is filing bankruptcy at a much greater rate. Social Security is only one special issue in these bankruptcies. Others include:
- Home Equity: Many people over 60 have substantial equity in their homes, and the limited homestead exemption isn’t enough to protect it all. Several options are available, such as a single filing and a tenancy of the entirety transfer, which enable people over 60 to file bankruptcy and stay in their homes.
- Retirement Account: The aforementioned 100 percent exemption usually applies to earned nest egg accounts, such as IRAs, 401(ks), and usually 529 college savings accounts or ABLE disability accounts. Different rules apply if someone else contributed to the account.
- Medical Bill Reaffirmation: Most doctors stop treating patients who don’t pay their bills, whether the bills were discharged in bankruptcy or the patient simply doesn’t pay them. To avoid cutoff, a Chicago bankruptcy lawyer often arranges a partial reaffirmation of medical debt. For example, the debtor might discharge a hospital bill but keep paying the individual physician’s bills.
Doctors and other creditors, including the U.S. government and offset procedures, while the debtor is in bankruptcy. If these matters weren’t resolved before filing, Section 362 of the Bankruptcy Code puts them on hold until the judge closes the case.
The Automatic Stay also applies to other creditor adverse actions, such as repossession, foreclosure, and wage garnishment.
Exemption Procedure
The Social Security exemption is clear enough on paper, but some practical considerations may apply, mostly commingling of funds.
Current income usually isn’t exempt in an Illinois bankruptcy. Most people deposit all income, from whatever source, into the same account. In these cases, nonexempt income is commingled with exempt benefits. Separating the two is often a very time-consuming process, and some money may get lost in the process.
We usually suggest that Social Security recipients start placing these benefits in a separate account at least ninety days before they file bankruptcy. That way, the funds transfer is outside the bankruptcy fraud presumption window. The trustee could still file such a motion, but unless the presumption applies, bankruptcy fraud is very difficult to prove, especially if the debtor works with a Chicago bankruptcy lawyer.
Connect With a Savvy Cook County Lawyer
No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.
Source:
ilga.gov/legislation/ilcs/documents/073500050K12-1001.htm
